Title: "Will PayPal's PYUSD Steal Market Share From Tether and Circle?"
Translated by: Kaori, Luccy, BlockBeats
On August 7th, PayPal announced the launch of the USD stablecoin PayPal USD (PYUSD) for transfers and payments. The stablecoin is issued by Paxos and backed by the US dollar, short-term government bonds, and cash equivalents. It will gradually be made available to PayPal's customers in the United States. Despite PayPal's involvement in the crypto space over the past few years, the official launch of its stablecoin can still be considered a significant event in the development of crypto.
Recently, Laura Shin interviewed José Fernández da Ponte, the Senior Vice President of Cryptocurrency at PayPal, to delve into how the fintech giant is formulating a long-term strategy for blockchain-based payments. BlockBeats has compiled and translated the interview, the full text of which is as follows:
Laura Shin: This week, PayPal launched the stablecoin PYUSD on Ethereum. What is PayPal's vision for PYUSD and how will it be used?
José Fernández da Ponte: Over the past four years, we have been active in the crypto space. PayPal's overall vision has always been to bridge fiat and Web3 and bring mainstream applications to the payment system. As a payment company, we are very concerned about payment applications, and the launch of PYUSD is a natural progression in this process. Starting with the use of traditional crypto tokens in applications, then moving to on-chain transfers, entering the international market, and now adding a fully supported and regulated stable value tool for payments, this is the culmination of the first phase. We do believe that stablecoins are the killer app of blockchain at the moment, and they are very close to the payment market that we are very concerned about.
Laura Shin: How do you expect to apply it? For example, which industries do you think will use it, DeFi? Or do you see it as simply for payments?
José Fernández da Ponte: We do believe that the fundamental principles of digital currencies are very suitable for payments, with some inherent advantages such as cost, programmability, and settlement time. Interestingly, much of the discussion has focused on the cost of each transaction, but I am more interested in settlement time.
We tend to say they are faster and cheaper, but when you make a payment, speed is cheap, and the advantage of settlement time is very clear. But this takes time, and this revolution will not happen overnight. It will take a few years before stablecoins become mainstream in everyday payments. But there are already some industries that are very suitable for using stablecoins. Currently, there are $122 billion in stablecoins primarily used for crypto trading and Web3 use cases, including DeFi as you mentioned, and we expect PYUSD to be used there as well. We have seen some early use cases, such as remittances, which is an area we are very interested in.
A company called Xoom, which PayPal acquired a few years ago, has been very active in the remittance field, so we do have the right to play a role in this area, and the integration between remittances and digital currencies has already begun. In the B2B payment field, we are seeing more and more adoption of stablecoins, and if you are a company exporting to foreign countries and want to receive payments, it is very powerful to have timely settlement instead of receiving a wire transfer that takes three to five days to clear.
Apart from cryptocurrencies, we believe the fourth niche market to adopt stablecoins will be digital goods. Economies like Minecraft or Roblox see about $100 billion in digital goods traded annually. If you are a developer selling digital goods in the current payment system, it may take 15 days to get your money. So, if you can do something native to the game and have instant settlement, the advantage is very clear.
Similarly, I think it will take a few more years before stablecoins become mainstream in domestic e-commerce or retail, but there is already a very large commercial market that can use stablecoins.
Laura Shin: So, do you mean DeFi will further advance?
José Fernández da Ponte: I think DeFi will be part of the first wave, and currently, you can only get PYUSD on the PayPal wallet. We are expanding the product, but it is certain that major trading platforms will also offer PYUSD, and then people can use it for traditional use cases.
Laura Shin: I saw some news saying that PYUSD can be sent to "compatible external wallets." There are some regulations that may prohibit transactions to self-hosted wallets, but I want to confirm if this includes self-hosted wallets?
José Fernández da Ponte: Yes, that's correct. Regarding compatibility, I would like to say that PYUSD is an ERC-20 token deployed on the Ethereum blockchain and can be sent to external wallets that support ERC-20 tokens, which is the meaning of compatibility.
Laura Shin: The user agreement contains some provisions that PayPal can reverse transactions, but I imagine this only applies to certain specific transactions, such as within the PayPal/Venmo system.
José Fernández da Ponte: I'm not sure which specific part you are referring to, but there are indeed some transactions related to fully supported and regulated stablecoins. Our issuance is approved by the New York DFS, and Paxos is the issuer. New York has very clear and strict requirements in terms of KYC and anti-money laundering regulations, which require the ability to implement appropriate control measures.
Laura Shin: There are already some very popular stablecoins designed very similarly to PYUSD, such as USDT and USDC. How do you plan to differentiate PYUSD from other similarly designed stablecoins?
José Fernández da Ponte: Yes, I think there are several different factors that make PYUSD have a very strong value proposition. First, it is obviously the PayPal ecosystem. PYUSD is the only stablecoin accepted by the PayPal ecosystem, including the current PayPal and soon Venmo, as well as our bilateral network. Therefore, millions of consumers and merchants will be able to access it and use it as a funding tool for PayPal transactions. This means that if you shop among the millions of merchants on PayPal and you have a PYUSD balance, you can use PYUSD as your funding tool for payments, which I think others cannot do.
The second aspect is related to the connection to fiat currency. PayPal leverages the banking connections we have built over the years. Converting from fiat currency to stablecoin is a cumbersome process, sometimes requiring transferring wallets to trading platforms to pay fees and then cashing out, which takes several days. But with PayPal, you can transfer PYUSD, sell it, and then withdraw it to your bank account. We believe this is an inherent advantage for both the upstream and downstream channels.
The third point I want to make is about compliance and regulation. PYUSD is issued by a New York trust and draws on our 20 years of experience in handling and preventing financial crime.
Laura Shin: Speaking of regulation, stablecoin legislation has already passed the preliminary committee stage in the House of Representatives. Was your timing for the launch coincidental, or did it give you confidence to launch?
José Fernández da Ponte: We have been following the legislative process for a long time. Obviously, there are still differences in the content of the legislation, but this is a democratic process. Overall, the passage of these bills through deliberation is not necessarily the trigger for our launch. There is a clear trend regarding stablecoin regulation now, a few months ago it was MiCA in Europe. Many markets have clear regulations on stablecoins, and now the United States is catching up, which is why we went to New York, as it has the strictest, most powerful, and most rigorous framework available for stablecoins.
Laura Shin: Representative Maxine Waters of the House released a statement saying, "She is deeply concerned about PayPal choosing to launch its own stablecoin without the federal regulatory, supervisory, and enforcement framework for these assets." What is your response to this?
José Fernández da Ponte: I have seen the statement from this senior member, and from the statement, I understand that her main point is to hope that legislation will regulate stablecoins at the federal level. As we just mentioned, this is part of the debate currently taking place in Congress. There are other members in Congress, both Republican and Democratic, who have different views, and this is part of the legislative process. We strongly support regulation through legislation, and as I said, this is currently the strictest framework in place, and we will comply with any legislation produced by Congress.
Laura Shin: Does PayPal believe federal regulation is necessary, or do you think regulation by individual states for stablecoins is sufficient?
José Fernández da Ponte: We are a payment company, and in this country, payment business is regulated at the state level. I think different places regulate in different ways. For example, in places like MiCA, it has a very clear definition of payment stablecoins. In our view, if stablecoins are related to payment activities, it is reasonable to include them in the payment framework, which is currently regulated at the state level.
Laura Shin: A few years ago, when Facebook (now Meta) launched Libra, it attempted to create a stablecoin that was not directly pegged to the value of the US dollar. But I wonder how the failure largely due to regulatory reasons has affected PayPal's launch strategy this time.
José Fernández da Ponte: We did have discussions about Libra, which was four years ago. But I don't think this will affect our approach, because our development in this area is the same as how we conduct our other businesses. We are both a tech company and a regulated financial institution with a 20-year history. Our approach has always been to prioritize regulation, and sometimes this means that our progress may be slower than other companies, but we are very concerned about regulatory and compliance frameworks, as well as our relationship with regulatory agencies. As we have emphasized in the past, we do business in 200 countries, which is something few institutions can do. We have always stressed that we will always coordinate with regulatory agencies in exploring this area. So I think this is not the influence of Libra, but it is just our nature.
Laura Shin: How do you plan to expand it to other regions of the world? Additionally, will you launch stablecoins anchored to other fiat currencies?
José Fernández da Ponte: We are currently focused on the US market, and we will continue to evaluate opportunities in other regions. As for stablecoins anchored to other fiat currencies, we are always evaluating different opportunities, but I cannot provide specific details at this time.
José Fernández da Ponte: We have already launched on the PayPal wallet, and the next focus is to enable the Venmo wallet to have this functionality as well, so it will still be based in the US, but we will also consider international expansion. We have not considered stablecoins priced in local currencies at the moment, and our priority is to ensure the success of this launch and make it beneficial to the crypto ecosystem.
Laura Shin: But I'm sure you must have a rough idea in mind about whether you plan to launch a Euro stablecoin or a Pound stablecoin.
José Fernández da Ponte: There are no plans at the moment.
Laura Shin: What will the upcoming monthly reserve report look like, and will it also show proof of reserves?
José Fernández da Ponte: As part of the New York framework, Paxos is the issuer of the token. Regular audits are required as per the regulations. So, it will be similar to other stablecoins issued by Paxos, such as USDP. Users will be able to see an audit report verified by a third party, showing the amount and composition of the reserves.
Laura Shin: But this is not something that can be identified by addresses, and people cannot use certain features to prove that their coins are still held in reserves.
José Fernández da Ponte: I think the best way for the interests of all parties is to visit the Paxos website, which provides reports for other stablecoins, and you can clearly understand the information we provide there.
Laura Shin: PayPal hopes to establish a digital native environment in some areas such as online games, which seems different from the existing user base of PayPal. How do you plan to attract these users?
José Fernández da Ponte: I am very interested in payments in the gaming industry. If you consider gaming, sometimes it may be perceived as only suitable for a younger demographic from an external observer's perspective. But in reality, the audience for gaming is very representative of the general population, and it is a very large industry with very strict and restricted computational requirements. From the perspective of solving difficult technical problems, this is a very challenging computational problem.
Many computational innovations are born in video games, and I believe many innovations in the payment field will also be realized in video games. We have envisioned some use cases that are not yet achievable, and stablecoins may make these use cases possible, such as streaming payments. Imagine paying by the second or minute when watching a video, instead of paying for the entire video? Or being able to take away digital goods purchased within the game environment? I think we have seen some very exciting experiments, including NPCs (non-player characters) or AI agents in games that can connect to a wallet and carry value, and then these autonomous agents in the game can buy and sell things within the game.
We cannot imagine these things out of thin air; what we do is release a platform product and then developers will develop on top of it.
Laura Shin: This is one of the reasons PayPal decided to design PYUSD as an ERC-20 token, and it sounds like planning for smart contracts and other features to make money more programmable.
José Fernández da Ponte: Yes, in the initial process, we had to think about whether we wanted to go the open-source protocol and traditional permissionless route or do something proprietary. Then we quickly chose the open way because we believe in following the developers. You shouldn't tell developers what to do; you should let them tell you what to do. The choice of Ethereum was a very clear decision because the developer community is already there.
The design of PYUSD is to become a multi-chain, so we definitely have no reason not to expand to other protocols or other layers of the same protocol in the future. Although Ethereum has higher fees compared to other protocols, it also has many advantages. For certain use cases, such as the small payment or high-speed, high-throughput use cases we mentioned, it may be very expensive, so we will definitely expand from there, but Ethereum is clearly the preferred deployment platform.
Laura Shin: This undoubtedly opens up a new revenue stream for PayPal. First, PayPal can make money from deposits such as government bonds. Is the fee for deposits or transactions 1.5%?
José Fernández da Ponte: Traditionally, the monetization mechanism for stablecoins is through reserve yield, but in the current interest rate environment, this has become a fairly large source of profit for the industry. However, we believe this should not be the only monetization mechanism. The interest rate environment may change, so our idea is that when these stablecoins are adopted, we will achieve monetization through tools that are closer to traditional payment business. That is, when merchants want to accept settlement in stablecoins, they need to pay a merchant discount rate.
Additionally, people may convert one type of currency's stablecoin to another type, which may involve a certain fee. Regarding fees, there is no fee when purchasing PYUSD on the PayPal app, and there is also no fee when selling PYUSD. You can buy $1 for $1 without any fees, and you can also sell $1, and your PayPal balance will receive $1, and of course, you can also transfer, and we do not charge any PayPal fees for these transfers. The only fee you need to pay is the fee required by the Ethereum protocol. Within the PayPal ecosystem, we do charge transaction fees, but there are no fees for stablecoins.
Laura Shin: Going back to my previous question about PayPal's revenue sources, how big does PayPal think this potential business line will become?
José Fernández da Ponte: In the long run, this could be very important, but our expectations for next year are quite moderate. Interestingly, this is usually a very polarized environment. The existence of stablecoins is evidence, right? There are currently $120 billion in stablecoins on the market, and we hope to capture a portion of the market share while also helping to expand the entire market.
A few days ago, I saw an analyst report that said stablecoins will grow from the current $122 billion to $28 trillion in five years, which is a huge growth, meaning a 22-fold increase in five years. But I think this is a project that will take many years to develop. We hope to establish the right use cases and gradually promote them, and growth will definitely happen, but we are taking a long-term development approach, and this will be a journey spanning many years.
Laura Shin: How will this application show this payment method to users? Is it one of the choices among all payment options, or are there any incentives to encourage people to try using it?
José Fernández da Ponte: There are two different places where it is displayed. The first is when you enter the app, there is a cryptocurrency section in the app, and you will see it as an additional token. You will see the tokens we support, such as Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and PYUSD, and you can buy, sell, and transfer to external wallets there.
In checkout transactions, we will provide the choice to consumers, without predefining or guiding them to use any specific payment method. So, it will appear as another payment option, but it will not be given more priority at checkout. If you decide to use PayPal and pay with a credit card, then your credit card will be displayed first, and the others will be displayed after that, including PYUSD.
Laura Shin: Okay, this discussion has been very interesting. Is there anything about PYUSD that I haven't asked but you would like to mention?
José Fernández da Ponte: As I mentioned at the beginning, we do believe that stablecoins are the killer app in this field. The advantages in settlement time, cost, and speed are very important, but it will take some time for mainstream adoption in the payment field. So, we have taken a crypto-first strategy and then started exploring some retail use cases. When it comes to competition, I believe we will capture a certain market share here, but I also believe there is a lot of demand in the market, and we hope there will be more fully supported and regulated stablecoins, which is good for the entire industry.
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